Freehold flats

In the 1960´s when the Developers raised Ashburton Court from the ashes of the war damaged Christ Church they created Ashburton Court Management Company Limited [“the Company”] and the first Company Secretary was Sir Alfred Blake KCVO, Lord Mayor of Portsmouth [1958-1959]. The Developers, being the Claxon family [mainly Mr Cecil Albert Claxon] controlled companies, C A Claxon Limited and Old Portsmouth Estates Limited, by a conveyance dated 17th August 1962 [HM Land Registry HP102157, Clause 4] confirmed they had vested the freehold of the common parts [garden, entrances, landings & staircases] of Ashburton Court in the Company on 5th July 1962. The nine individual flats were each sold as “Freehold” rather than “Leasehold” although there was/is a 999 Lease regulating the common parts. Only the owners of the nine flats may hold shares in and be Directors of the Company.

A recent Counsel´s Opinion [written advice by a London Barrister from Lincoln´s Inn setting out what a Judge might decide in such a matter] confirms that the wording of the original papers in the 1960´s does indicate that individual “Leases” were to have been offered to “Freeholders” upon all the flats being sold. This never happened. Furthermore, Counsel´s Opinion confirms that only a majority [i.e. those holding 51% or more of the shares] of the owners are needed to progress a change from Freehold to Leasehold provided that all existing rights remain for all owners.

There are difficulties with “Freehold” flats as opposed to “Long Leasehold” flats. Owners [and any lender to an owner] cannot control the unreasonable behaviour of other owners, especially with regard to matters such as:

a) Fire Risk/Precaution and other Health & Safety Issues;

b) Safe maintenance/upkeep of each property and limits on any internal structural alterations;

c) The prompt payment of management charges agreed by co-owners – whereas failure to pay such charges over a long period may [with Court approval] lead to forfeiture of “Leasehold” ownership such that sales proceeds may meet such long overdue charges;

g) Cleaning of windows, colour control of any outside painting, posting of signs etc., etc.

As a result The Council for Mortgage Lenders [part of UK Finance since July 2017] advises its members not to accept “Freehold” flats as security except in very limited cases. The results of this advice may be seen on:

As a result of these difficulties with “Freehold” flats [according to professional advisers in the Southsea area] the marketability of such flats is more difficult than with “Leasehold” flats. This means that “Freehold” flats sell at lower prices than “Leasehold” flats. Ashburton Court is thought [in 2017] to be the only remaining block of Freehold flats left in the wider Southsea area.

Comments from local advisers include:

Austin & Wyatt, Estate Agents June 2016 – Mr Ian Bolton writes:

” Over many years I have been asked to value and sell properties in your block and the only way I have been able to sell them are to cash buyers…at a greatly reduced price. My experience, and to my knowledge it would be nearly impossible to get a mortgage on the apartment.”

D M Nesbit & Company, Chartered Surveyors & Auctioneers. In September 2011 a full report was prepared on the subject in which Mr David Nesbit wrote:

” It is most unusual for the ownership of individual flats to remain on a freehold basis. There has been a substantial volume of new purpose built or converted flats throughout Portsmouth and Southsea for over 50 years all sold on long leasehold terms…..”

“In our experience, whilst there would be interest in any flat in Ashburton Court due to its convenient location in Southsea, sales have only been negotiated to purchasers on a cash basis due to the freehold tenure. In those circumstances, purchasers negotiate reduced prices.”

Larcomes, solicitorsOctober 2011 – Mr David Sumner writes:

Summary of Disadvantages of Freehold Flats;

Low market value attributable to freehold flats;

Security issues with most lenders in respect of freehold flats;

Problems enforcing positive obligations in relation to repair and maintenance and insurance between other freehold flat owners;

Complex and cumbersome procedure for creating a system and chain of covenants upon each disposition of title of a freehold flat;

Enforceability of responsibilities via the court system for freehold flat owners;

Issues surrounding missing or dissenting freehold flat owners.

Summary of Advantages of Leasehold Flats

Contractual enforceability of covenants through a mutual landlord;

Transparent system of mutual covenants and responsibilities for each flat owner;

Simplified process for repair and maintenance of the building in which the flats form part;

Mutual service charge and insurance responsibilities;

Participation of flat owners where a management company or residents association is set up.

Paris Smith, solicitors July 2017 – Mr David Eminton writes:

….”I appreciate, as did James Snaith whom I had consulted here, that freehold flats are not desirable”…….

At an AGM for Ashburton Court Management Company Limited held on 13th November 2017, the Directors/shareholders/owners unanimously resolved to authorise the Company Secretary to write to a selection of local firms of solicitors seeking costs estimates for the move from Freehold status to Long Leasehold status.

The Need for Leasehold Covenants

Leasehold flats – do you need a Deed of Covenant?

What is a covenant?

In simple terms, a covenant is a legal promise that you will carry out certain acts or refrain from doing certain things. There are two types: positive and negative covenants. Positive covenants are acts that you must carry out such as paying service charges, repainting every five years, keeping the property in good repair, and so on. Negative covenants however stop you doing certain acts with the property such as not allowing you to carry out illegal acts or cause a nuisance, or not allowing you to sublet the property. So it is important that you read the covenants in the lease carefully so that you understand what restrictions apply when you agree to buy a leasehold property.

What is the deed of covenant for?

With Freehold titles, positive covenants do not pass with the land and so are not enforceable upon any new ownerof the property. However, with leasehold titles positive obligations are automatically binding upon successors in title to both landlords and tenants. When buying a leasehold property, the deed of covenant acts to confer rights between the parties or protect what is known as ‘Privity of Contract’. This principle provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract. The deed of covenant is therefore used to create a direct contract between the landlord/managing agents and the new leaseholder. This way, the landlord/managing agents are able to go directly to the new leaseholder to collect ground rent and service charge payments, as well as being able to enforce the covenants on the new leaseholder directly.

Why is it needed?

Aside from the main reason mentioned above, the majority of leases today state that a deed of covenant is required upon any transfer, assignment or under-letting of the property. Since this deed forms one of the obligations in the lease, failure to enter into such a deed amounts to a breach of the lease. In many cases, it also means that the managing agents/landlord will not accept any of your payments for service charge or ground rent until the deed is submitted, since if they accepted the money when there has been a breach, this could waive the landlords’ right in future to enforce the covenants in the lease . If this happens, even though a leaseholder is sending your service charge and ground rent payments as required, since the management agents/landlord will not accept this money due to a breach of the lease, you can end up getting into arrears with your payments which could lead to more substantial penalties and interest.

But is a deed of covenant still needed?

There has been much debate in the legal world as to whether deeds of covenant still have any useful application in modern day law. Under the Landlord & Tenant (Covenants) Act 1995, Section 12 essentially states that on any assignment of the Lease, the benefit and burden of covenants made by the tenant with the third party pass to the tenant’s assignee – so privity of contract is still maintained between the new leaseholder and the landlord/management company and so a deed of covenant will most likely be superfluous to the entire process.

There is also Section 78(1) of the Law of Property Act 1925 which states that in respect of all covenants entered into after the Act came into effect it is implied that the covenants are to run with the land unless the covenant itself EXPRESSLY states that the covenant is EXCLUSIVELY for the current landlord/management company and the current leaseholder.

In conclusion…

Where your lease states that a deed of covenant is required, you need to sign this in order to comply with all of the obligations set out within the Lease you are now taking over. While legally speaking providing for such a deed may be unnecessary, it has become common practice for leases to require this and the practical implications of not supplying this deed could cause you to be in breach of your lease.